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Brazil economic growth allays recession fears

28/02/2014

Brazil avoided slipping into recession last year as the Latin American country leaned once again on its crumbling pillars of economic growth – household consumption and government spending.
The economy grew 0.7 per cent in the fourth quarter, above all analysts’ estimates and in contrast to data from the central bank this month indicating Brazil may have entered a technical recession.

However, economists cautioned against reading too much into the results. Fourth-quarter growth was based on a weak comparison of a 0.5 per cent contraction in the previous quarter and was helped by a 4.1 per cent rebound in volatile export figures that may be difficult to maintain.

While the data showed a surprise expansion in investment of 0.3 per cent, there was little sign that the country is letting go of its exhausted, consumption-led model of growth, they said.

“We have to be careful about being too optimistic about these numbers – it was a poor result based on government and household spending that will only create more problems in the future via issues such as higher indebtedness,” said Otto Nogami, an economics professor at São Paulo’s Insper business school.

Household consumption grew 0.7 per cent in the quarter, while government spending rose 0.8 per cent – together, they account for about 84.5 per cent of the Brazilian economy, said Mr Nogami.

The data comes a day after the central bank slowed its tightening cycle, raising interest rates by only 25 basis points in an attempt to balance weak growth and inflation concerns.

Nevertheless, Thursday’s headline number will probably come as a relief to President Dilma Rousseff, who faces presidential elections in October. Last year the economy grew 2.3 per cent – far higher than the 1 per cent in 2012.

However, Neil Shearing of Capital Economics said the economy’s model would be difficult to sustain beyond the elections.

“It has become increasingly clear that Brazil’s consumption-led growth model is now failing to deliver the kind of growth rates that Brazil has got used to,” he said.

Ms Rousseff looks set to oversee the weakest period of growth of any president since Fernando Collor, who was impeached in the early 1990s, he said.

The government is also under pressure to cut its own spending, and has promised $18.5bn in budget cuts this year in an attempt to avoid a damaging debt downgrade.

Brazil has made more efforts than other emerging market countries such as India and Russia to force through the structural reforms needed for greater investment, but progress is painfully slow, said Mr Shearing.

Investment rose 6.3 per cent in 2013 but made little impact on Brazil’s investment rate, which rose to 18.4 per cent from 18.2 per cent of GDP. It is one of the lowest in the region and needs to reach at least 20 per cent, said Aurélio Bicalho, an economist at Brazil’s Itaú Unibanco bank.

Bureaucracy and inefficiency also mean that when investments are made it can still take a long time for the effects be felt throughout the economy.

It is now two years since the government auctioned off São Paulo’s international airport ahead of the 2014 World Cup, yet the only major improvement so far at Guarulhos has been the construction of an eight-storey car park.
On Wednesday night, planes bound for São Paulo were grounded across the country after the whole airport suffered a 20-minute blackout.